Afternoon analysis 17.03.2015

A rebound in the EUR/USD has been extended, as the US reports missed expectations. Employment and wages numbers with no influence on the zloty. The ZEW index and inflation numbers supported the euro.

Before the Federal Open Market Committee meeting, the dollar extended losses. However, this move is rather a correction – the base scenario for tomorrow's meeting is the Fed to drop “patience” in its statement (more about alternative scenarios in our previous commentary).

A similar scenario will pave the way for the Fed to raise interest rates in July. As a result, the dollar will gain very strong factor underpinning the US currency appreciation. Thus, the US currency is set to extend gains against all its major pairs, especially against the euro.

Nevertheless, today's data from the US has been not favorable for the dollar. Housing starts numbers dropped 17 percent to 984k – the deepest drop since February 2011. A result below last month reading, when the number stood at 1.07 million. Expectations median stood at 1.04 million.

On the other hand, the data on building permits were better than expected. It rose 3 percent to 1.09 million – more than 1.06 million in the preceding month – a reading above expectations for 1.07 million.

A broader view on recent reports from the US economy suggest that the expansion may be loosing steam. Retail sales and industrial production posted three declines in a row. Moreover, consumer and industry sentiment indexes posted weaker results. And now the housing market is disappointed.

In turn, today's data from the euro zone surprised positively. The final reading of consume inflation was in line with its first estimations – it stood at minus 0.3 percent, up from minus 0.6 percent in preceding period. However, the core inflation reading was above first reading – it stood at 0.7 percent – more than 0.6 percent previously estimated. Moreover, the ZEW index – a measure of expectations for the German economy expansion – posted results better than estimated.

Some weaker reports from the US and few better than expected numbers from the euro zone, let the EUR/USD to sustain its rebound. This move might be continued in the first part of tomorrow's session, but when the FOMC releases its decision, the dollar will rather increase.

Zloty dropped against the euro

The strengthening of the euro has been broad bases. The euro posted gains against all major currencies. The EUR/PLN increased to 4.14 zloty, erasing gains from Monday.

Today's reports from the Polish economy had little effect on the zloty. Wage growth stood at 3.2 percent in February – in line with expectations. Last month the pace of growth stood at 3.6 percent. The employment growth stood at 1.2 percent – a result similar to the previous month and little below expected 1.3 percent. Tomorrow's data on retail sales and industrial production may have stronger impact on the zloty.

The Polish currency remained under the influence from the sentiment in the broad market. Today's moves – a stronger euro and frank – are parts of the correction in the major currency pair. This situation will last until tomorrow's session and it will probably reverse when the FOMC releases its decision.